Both the Union Pacific and the Central Pacific met
the same basic financial difficulty. Government bonds provided only half
the necessary capital, and the land grants, potentially of enormous
value, supplied no ready cash. Thus construction depended heavily upon
private investment. But there was no incentive to investors. A railroad
through virtually uninhabited country could not be expected to return a
dividend for many years. And Congress required railroad securities to be
sold at par for cash. Both companies therefore resorted to a favorite
device of 19th-century railroad buildersa construction company
with interlocking directorate free of Government regulation.

The Union Pacific's construction company was the
Crédit Mobilier of America. In 1864 Durant bought the
Pennsylvania Fiscal Agency, a corporation loosely chartered by the
Pennsylvania Legislature to engage in practically any kind of business,
and renamed it the Crédit Mobilier. The directors and principal
stockholders of this company were virtually the same as those of the
Union Pacific. Greatly simplified, the process worked like this: The
Union Pacific awarded construction contracts to dummy individuals, who
in turn assigned them to the Crédit Mobilier. The Union Pacific
paid the Crédit Mobilier by check (i.e., cash, for the benefit of
Congress), with which the Crédit Mobilier purchased from the
Union Pacific, at par, U.P. stocks and bonds, which it then sold on the
open market for what they would bring. The construction contracts were
written to cover the Crédit Mobilier's loss on the securities and
to return generous profits. In this manner the directors and principal
stockholders of the Union Pacific, in their opposite role as directors
and stockholders of the Crédit Mobilier, reaped large profits as
the rails advanced.

The Big Four used an almost identical device to build
the Central Pacific. Although in practice continuing to share in the
management of the Central Pacific, Crocker resigned from the directorate
and formed the construction firm of Charles Crocker and Company, in
which Stanford, Hopkins, and Huntington were the only stockholders. The
connection between the two companies was too obvious, and in 1867 the
Big Four organized the Contract and Finance Company, with Crocker as
president. Acting for the Central Pacific, they awarded to this company
the contract for building the road from the California line to the
junction with the Union Pacific, as well as for supplying all materials,
equipment, rolling stock, and buildings. The chief advantage of the
Contract and Finance Company over the Crédit Mobilier, as
railroad historian Robert E. Riegel pointed out, "was that it was able
to get its accounts into such shape that no one has ever been quite able
to disentangle them."

Such techniques not only pushed the railroad to
completion in record time, but also made its financiers extremely
wealthy men. The Union Pacific cost about $63.5 million to build, of
which about half represented the Government s loan. The best estimate of
profits gained is about $16.5 million, although the enormity of this
figure emerges only when it is understood that at no one time did
invested capital exceed $10 million. Profits thus amounted, not to
27-1/2 percent, but to more than 200 percent. The Central Pacific's
figures are more difficult to arrive at, mainly because many of its
books were "accidentally" destroyed by fire during the Congressional
investigation of the Crédit Mobilier, The best authority,
however, places the cost of construction at $36 million. The company
received land grants and Government bonds valued at $38.5 million, while
Stanford admitted that $54 million in Central Pacific stock transferred
to the Contract and Finance Company in payment of construction contracts
represented virtually net profit.

There was an inevitable reckoning. Both railroads
were burdened with inflated capitalization that meant decades of high
rates and operating losses. The Crédit Mobilier investigation in
1872, moreover, brought the railroads bad publicity that strained
relations with the public and the Government for many years and produced
hostile legislation. Nevertheless, almost all railroad historians, while
deploring the financial buccaneering of the Pacific Railroad builders,
agree that only through such methods could the railroad have been built
without far more liberal Government aid.